German Financial Regulator on Initial Coin Offerings

BaFin Journal, November 2017

Legal Basis

Since stock corporation law does not apply to ICOs, tokens do not require membership, information, control and voting rights. The provider can decide freely which rights or claims he grants to investors through the tokens. In most cases, providers describe their project and how the tokens work in a so-called whitepaper; occasionally they also publish terms and conditions. The contents of these documents, in contrast to the prospectuses of a share issue, are neither prescribed by law nor by a supervisory authority for completeness.

Risks for Consumers

The lack of legal requirements and transparency requirements for ICOs implies enormous risk for the investor. On the one hand, investors should be aware of the risks of loss — even an irreversible total loss of their investment is possible. Tokens are often subject to large price fluctuations. Some vendors are promising the tradability of their tokens on secondary market platforms. However, investors must be aware that they are not entitled to it and that the secondary market platform may not be regulated. The investor alone carries the risk that he cannot sell acquired tokens or only at a price that does not meet his expectations. He also carries the sole responsibility for the secure storage of the digital keys (private keys) in order to manage at all his tokens. The loss or theft of the private key equals a loss of all associated tokens.

What Consumers Should Do

Before consumers decide to invest in ICOs, they should always check the identity, the seriousness and creditworthiness of the token provider. Since this is not subject to transparency regulations, they are on their own. In particular, investors should inform themselves about the domicile, legal form, date of incorporation, persons involved and capital resources of the provider, if the latter does not provide any information. If the provider claims to be subject to ICO-specific supervision by government authorities, investors should review this on the regulators’ websites. The registration of a foundation in Switzerland, for example, does not contain any information about the regulation of the ICO.

Role of BaFin

BaFin decides in individual cases on the basis of the concrete contractual structure of an ICO, whether the provider requires a license under the German Banking Act (KWG), the Capital Investment Code (KAGB), the Payment Services Supervision Act (ZAG) or the Insurance Supervision Act (VAG) and whether it has to comply with the requirements of the prospectus.

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